Falling costs help after tough year for dairy

Falling costs help after tough year for dairy income, confidence


 Dairy farmer confidence has taken a hit.

Dairy farmer confidence has taken a hit.

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After a lean year for milk production and cash flow the broader milk sector is enjoying some major inputs cost cuts and the likelihood of some lift in farmgate payments

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The tough 2016-17 season experienced by many southern Australian dairy farmers has hit farm cash flows, farmer confidence and overall milk production, says Dairy Australia.

However, the industry’s latest situation and outlook report notes the broader milk sector provides some positivity with costs for major inputs contained and most current farmgate milk price forecasts providing at least some upside on 2016-17 levels. 

Confidence about the future of the dairy industry among farmers measured by the National Dairy Farmer Survey (NDFS) and conducted in February and March dropped from 67 per cent in 2016 to 53pc in 2017.

The hardest hit southern regions with significant declines were in the areas serviced by WestVic Dairy, GippsDairy, DairyNSW and DairyTas.

That drop in confidence “sounds about right” to United Dairyfarmers of Victoria president Adam Jenkins.

“Confidence right now is probably the lowest it’s ever been,” the South Purrumbete farmer said.

“I’ve spoken to a lot of friends and neighbours who are saying they’re over it, and these are good farmers and significant contributors (to the industry) so we need to take heed.

“To rebuild trust and confidence, we need transparency in pricing.”

The NDFS survey also revealed 27pc of farmers either have, or would like to, change processor and their profitability is at a three year low.

Only 45pc of farmers surveyed anticipated a profit in 2016-17. 

Mr Jenkins said the ability for dairy farmers to run profitable business and have fair, transparent pricing structure were paramount for the industry to recover after the 2015-16 season’s farmgate milk price stepdowns.

“We’ve got to face the fact that in the past 10 years, the farmgate milk prices has averaged $5.50 (a kilogram of milk solids) and costs of production are nearing that, which leaves very little room for profitability and growth,” Mr Jenkins said.

He said the pricing structures which gave a higher value to a smaller few had cut milk payments across the whole production pool, to the detriment of the industry in the past few years.

Nationally, milk production for 2016-17 is also expected to be down about 7.5pc on the previous financial year to about 8.95 billion litres, according to Dairy Australia’s senior analyst, John Droppert.

Culling rates 40pc above average have persisted in 2016-17, but the rate has slowed since October 2016.

This herd cull was likely to further constrain Australian milk production in 2017-18.

But, the NDFS survey also revealed a third of farmers expected to grow their herd size in the next 12 months and close to two thirds anticipated their production to increase in the next three years which signaled a modest growth in milk volume to around 9 billion litres for the season ahead.

The situation and outlook report also noted input costs had generally been contained.

Record international grain production and strong harvests in Australia had helped keep a lid on dairy feed prices.

There has been little change to the hay market in the past few months with subdued demand, ample supply and low prices. 

​Despite some upward pressure on phosphate prices, fertiliser was also generally cheaper than a year ago, with potash and nitrogen indicators trading around 20pc below year-ago levels.

Most irrigation systems were expected to receive a high seasonal determination in 2017-18, and temporary water prices ended the 2016-17 season well below the $100/megalitre mark.

Internationally, improved margins have halted the fall in milk production in most exporting regions.

Overall demand for exports continues to grow with the volume of dairy products traded in the 12 months to February rising 3.8pc.

A recovery in demand from Greater China accounted for around 30pc of this, while south east Asia has also seen growth.

Tonnages exported to the Middle East and North Africa and Japan have eased slightly.

“In the long-term, the growth opportunities are there with the growing global population (and demand for dairy),” Mr Jenkins said.

United Dairyfarmers of Victoria president, Adam Jenkins.

United Dairyfarmers of Victoria president, Adam Jenkins.

Although the industry report noted there was ongoing downside risk in international markets.

Mr Droppert said domestic demand across dairy products remained strong with supermarket sales volumes continuing to grow strongly for most key dairy categories albeit with continued pressure on value.

For example, cheese and yogurt have seen increased sale volumes, but value growth lagged as retailer discounting pressure mounts and consumers sought out value offerings.

“The end of a difficult 2016-17 season, and the potential for better operating conditions in 2017-18 offers hope the rebuilding of confidence and relationships along the dairy supply chain will accompany better profitability,” Mr Droppert said. 

“There is widespread appetite to apply the lessons of recent challenges and take the industry forward. 

“Consumer support at home, and a balanced market internationally, provide a promising backdrop to getting this done.”

Mr Jenkins echoed those sentiments.

“I think, I hope there is light at the end of the tunnel; we’re definitely seeing change and this is a defining moment in our industry.”

The dairy industry code of conduct (which has been drafted and sent out to other stakeholder groups) and the federal government’s proposed milk pricing index (the request for tenders to develop it and associated educational tools and resources closed last week) could help restore farmers’ confidence.

Post-farmgate actions

Dairy Australia’s latest situation and outlook report highlighted the pressure felt by the industry’s post-farmgate sector.

Murray Goulburn co-op’s planned closure of its Rochester, Kiewa (both northern Victoria) and Edith Creek (Tasmania) plants and scrapping its Milk Supplier Support Package (MSSP) were notable examples.

Fonterra was also pushed to make changes to its loan schemes, reimbursing interest payments made on its loan scheme by current and retired suppliers, and making a 40c/kg (MS) additional payment above its base 2017-18 farmgate milk price.

The company's rebuilt Stanhope cheese plant will commence production in the new season.

Parmalat resolved an industrial dispute concerning its Echuca plant, but remains in arbitration with Queensland collective bargaining group Premium, over proposed changes to milk pricing.

Saputo completed its takeover of Warrnambool Cheese and Butter in late February, and Bega Cheese sold one of its four spray driers at Tatura, and its Derrimut infant formula canning facility to Mead Johnson Nutrition.

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